HEI: Watching, waiting, hoping

THE HEISENBERG writes:

Traders are staring down a data-heavy week ahead of Election Day in the US, as durables, consumer confidence, claims, personal income/spending, and, of course, the first read on third quarter GDP, headline a crowded docket stateside.

Obviously, Q3 GDP will show the US economy staged a dramatic rebound in the three months following the catastrophic collapse that accompanied the pandemic lockdowns. In short, the worst quarter for the world’s largest economy was followed immediately by the best, as a mechanical bounce akin to that witnessed in the labor market played out across July, August, and September.

It’s likely the Trump administration will attempt to push the manifestly absurd narrative that the US economy is now “better than ever,” the same way Mike Pence suggested labor market gains in May, June, and July represented job “creation” as opposed to the recouping of the unthinkable tragedy that unfolded during the previous two months. Below, for reference, is what the rebound in GDP will probably look like.

The significance of this for markets is likely to be muted. It’s backward-looking, but more importantly, it comes ahead of two enormous event risks in November, when the election and expected vaccine approval will help determine whether expectations of a pro-cyclical rotation tied to a more reflationary macro backdrop were misplaced (or not).

“We expect a Democratic sweep will have only a modest net impact on the medium-term path of S&P 500 earnings,” Goldman said late Friday. “Our analysis suggests that the combined effects of higher corporate tax rates, more fiscal spending, and lower tariffs under the proposed Biden-Harris policy agenda will result in annualized S&P 500 EPS growth of 13% through 2024, similar to our baseline forecast that assumes no policy changes.”

This is broadly consistent with the idea that pro-growth policies which focus on demand-side stimulus are likely to produce outcomes that will offset the supply-side drag from higher tax rates, the burden of which will fall on the rich, who have the lowest marginal propensity to consume.

As for the near-term outlook for stimulus, the stalemate between Nancy Pelosi and Steve Mnuchin remained over the weekend. As documented here, a deal between Pelosi and Mnuchin seemed imminent as late as Thursday, with both sides expressing optimism around a package worth some $2 trillion.

Mitch McConnell and other Senate GOPers, however, indicated that even if a bill were drafted, blessed by Trump, and pushed through the House, its chances of becoming law were slim. Democrats last week blocked what they called a cynical bid by McConnell to resurrect a “targeted” relief bill from September, deriding it as a “sham.” For his part, Trump insisted he could bring reluctant Republicans on board, but there was scant evidence to support the president’s claim.

On Sunday, Pelosi blamed The White House for the ongoing gridlock, while Mark Meadows insisted the opposite is true. But, as ever, it really comes down to McConnell.

“It could happen this week in the House,” Pelosi told CNN, before noting that “as to whether it will happen in the Senate,” the onus is on Mitch. “We want it the sooner the better, and that’s why we’re making concessions,” she added.

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